Enterprise Risk Management in Wipro's Software Services Division
 |
Details
Themes: -
Period : 2003
Organization : Wipro
Pub Date : 2003
Countries : India
Industry : Information Technology
Buy Now
Case Code : ERMT-001
Case Length : 13 Pages
Price: Rs. 300;
Tools
ICMR regularly updates the list of free cases. To view more free cases, please visit our site at frequent intervals.
Human Resources Risks
|
Wipro's ability to execute projects and to attract new clients depended critically on its ability to attract, train, motivate and retain highly skilled professionals, especially project managers, software engineers and other senior technical personnel. If Wipro could not hire and retain additional qualified personnel, its ability to obtain new business and expand its existing business would be impaired. Wipro faced the risk of not being able to hire and retain enough skilled and experienced employees to replace those who left. In the face of continuing changes in technology, evolving standards and changing client preferences, redeployment and retraining of employees, might not be adequate to overcome manpower shortages. Financial RisksWipro defined market risk as the risk of loss of future earnings, or a decline in fair values or future cash flows that might result from a change in the price of a financial instrument. |
|
The value of a financial instrument might change as a result of changes in the interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes. Such market risk sensitive financial instruments included foreign currency receivables and payables and long-term debt.
Wipro's exposure to market risk was a function of its investment and borrowing activities and its foreign currency transactions. Most of Wipro's exposure to market risk arose out of its foreign currency denominated accounts receivables and investments in foreign currency denominated securities. The two main components of market risk for Wipro were interest rate risk and exchange rate risk.
Wipro managed market risk through a corporate treasury department, which evaluated and exercised independent control over the entire process of market risk management. The department recommended risk management objectives and policies, which were approved by the senior management and the audit committee. The activities of the department included management of cash resources, implementing hedging strategies for foreign currency exposures, borrowing strategies, and ensuring daily compliance with market risk limits and policies.
Exchange rate risk arose in the context of foreign exchange revenues, receivables and payables, investments in foreign currency denominated securities and foreign currency debt. Wipro's net exchange rate exposure for the years ended March 31, 2001 and 2002 was $37.5 million and $15.5 million, respectively. Wipro evaluated its exchange rate exposure and entered into foreign currency forward contracts to mitigate such exposure. Wipro had approved risk management policies that required it to hedge a significant portion of its exposure. Current Indian regulations did not permit Wipro to hedge the exposure on foreign currency denominated securities.
In forward contracts, which typically matured between one and six months, credit risk was involved. Since the counter parties for Wipro's exchange contracts were banks, Wipro considered the risk of non-performance by them as insignificant.
As of March 31, 2001, Wipro had interest rate swap agreements outstanding in the notional principal amount of $3.3 million while on March 31, 2003 it did not have any outstanding amount. The counter parties for Wipro's interest rate swaps were banks. Wipro considered the risk of non-performance by the counter parties as non- material.
Wipro's interest rate risk primarily arose from its long-term debt. Wipro adopted appropriate borrowing strategies to manage interest rate risk. Wipro also entered into interest rate swap agreements to hedge interest rate risk (Exhibit: II gives the maturity profile of Wipro's debt as on March 31, 2002). Based on the maturity profile and composition of its debt portfolio, Wipro estimated that changes in interest rates would not have a material impact on its operating results or cash flows. Surplus cash was generally invested in short-term investments. Generally this did not expose Wipro to significant interest rate risk.